Trinidad and Tobago: Selected Issues and Statistical Appendix

This paper analyzes the historical and current energy booms of Trinidad and Tobago, and points out the main policy issues during boom times. It provides practical suggestions on the long-term management of the expected resource windfall in Trinidad and Tobago, and outlines theoretical guidelines to calculate sustainable consumption out of energy wealth and targets sustainable levels of non-energy fiscal deficits. It discusses the developments, main policy issues in the state-owned nonfinancial enterprise sector, and the proposed restructuring plan for the state sugar company. It also provides a Statistical Appendix for Trinidad and Tobago.

Abstract

This paper analyzes the historical and current energy booms of Trinidad and Tobago, and points out the main policy issues during boom times. It provides practical suggestions on the long-term management of the expected resource windfall in Trinidad and Tobago, and outlines theoretical guidelines to calculate sustainable consumption out of energy wealth and targets sustainable levels of non-energy fiscal deficits. It discusses the developments, main policy issues in the state-owned nonfinancial enterprise sector, and the proposed restructuring plan for the state sugar company. It also provides a Statistical Appendix for Trinidad and Tobago.

III. Recent Developments and Main Policy Issues in the State Owned Non-Financial Enterprise Sector 20

A. Introduction

39. In Trinidad and Tobago, the state-owned enterprises (SOEs) play a significant role in the national economy. The extent of government ownership of various SOEs in different sectors is shown in Table 1. With the exception of a few, most of the SOEs incur losses requiring transfers from the central government for their operational expenditures, in some cases for debt service, and are dependent on debt guaranteed by the government. Some of the SOEs carry out large infrastructure projects on behalf of the government financed through commercial loans guaranteed by the government. Most of these capital expenditures are off-budget.

Table 1.

Trinidad and Tobago: Public Enterprises and Statutory Bodies

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Source: Ministry of Finance

40. The main policy issues related to SOEs are reviewed and we conclude that: (i) the current management system for the SOEs has resulted in operational losses and a lack of fiscal transparency, thereby increasing SOE dependence on the government, and (ii) there is a need to define the reform process within a specified timeframe to enable the SOEs to become economically efficient, more accountable, transparent, and amenable to private participation.

B. Government Policies on SOEs

41. Since the time of the country’s independence (1962), as part of an import-substitution based industrialization strategy, the government legislated the formation of over 50 SOEs aiming to increase domestic production of goods and services. Overtime, SOE operations expanded nearly into all sectors, including energy, financial, manufacturing, transport, electricity, and water services. Investment by SOEs was equivalent to 8 percent of GDP by 2002, having doubled since 1991. This mainly reflected capital expansion in the energy sector. SOE’s savings on average was less than 4 percent of GDP over the same period (Figure 1).

Figure 1:
Figure 1:

Trinidad and Tobago SOEs Savings-Investment

Citation: IMF Staff Country Reports 2003, 233; 10.5089/9781451837612.002.A003

42. The government’s intervention in the SOEs has mainly been through fixing market prices for products and services, and protecting their market share by restricting entry of other firms. For example, the Regulated Industries Commission (R1C) determines the water and electricity tariffs, while the ministry of energy regulates fuel prices. Market access to strategic services was restricted by issuing licenses, imposing import controls, and subsidizing goods and services.

C. The Financial Performance of SOEs

43. SOEs performance has been suboptimal as operational losses have risen due to a number of factors: absence of operational frameworks, unclear and contradictory goals, bureaucratic procedures, lack of sufficient working capital, overemployment with relative higher wages, non-commercial management approach, inability to respond to market signals, and frequent government intervention.

44 The SOE overall deficit averaged 2¼ percent per year between 1997 and 2002, partly reflecting low revenues and high current expenditures. Preliminary estimates for FY 2003/04 indicate further deterioration in the overall deficit to 5 percent of GDP, due to user charges being below the economic breakeven level, and higher average operational costs. The main contributors to operational losses are the sugar company, CARONI and the water utility, WASA. CARONI’s operational losses averaged about ¾ percent of GDP per year from 1999 to 2002 period. Financial performance was weak partly due to the workforce, whose wages are roughly double those of Brazilian sugar cane workers. WASA operating losses averaged ½ percent of GDP per year during 1999 to 2002 period, largely due to inefficiency in operations and low user charges.

45. Over time, documented operational frameworks between government and the SOEs and among the SOEs themselves have become outdated resulting in a weak performance monitoring system, and reduced transparency. This has been exacerbated by the government’s increased reliance on SOEs for implementing a number of large infrastructure projects, while circumventing procurement rules.

D. Trinidad and Tobago Public Sector Reform

46. Since 1990, the government’s reform in the nonfinancial public enterprise sector has not realized the desired objectives. Recently, a Junior Finance Minister was appointed to manage the reform program in order to expedite the process of decision making and limit the risk of overlapping powers. Three major divisions were established to focus on monitoring public enterprises, divestment, central audit and an appeals tribunal. A “State Enterprise Performance Monitoring manual” to document structured and systemic functions of roles and relationships of the government and the SOEs was compiled (Box 1).

47. In 2002, the government presented to parliament a policy statement on privatization whose main objectives are to divest management and ownership of SOE with preference for local investors. Plans indicate divesting management and retaining ownership in the Port of Spain Ltd. and Port of Spain Infrastructure Company Ltd. They plan to offer management contracts on Destination Trinidad and Tobago Ltd, Trinidad and Tobago Inter Island Company Ltd, Port of Spain Dredging and Towing Services, Port Scarborough Cargo Handling, and CARICOM Wharves.

Trinidad and Tobago: SOEs Monitoring Manual

The State Enterprise Performance monitoring manual outlines the role of line ministries to set policy frameworks for the state enterprises, while the ministry of finance monitors on a macro level the SOEs financial performance. The main features include:

  • The roles of interacting agencies, mainly central government, and SOEs.

  • The monitoring mechanism, through communicating policy issues affecting SOEs and ensuring compliance, reviewing strategic plans and annual budgets, ensuring consistency between government’s macro economic policies and plans of the SOEs, and reviewing proposals related to investment and joint ventures.

  • The performance monitoring guidelines include that all procurements should be tendered to the public, reported to the ministry of finance with approval required for procurements exceeding TT$5 million. The SOEs are no longer required to appoint the Auditor General as the Auditor, but they should publish the audited annual accounts within three months of the financial year; all profitable state enterprises are to pay a dividend; and expenditure controls are set particularly on foreign travel. Board fees, and consultancy contracts.

  • As for reporting, the following have to be submitted to the ministry of finance: on a monthly basis, the cash statements of operations; on a quarterly basis, the quarterly reports, status of loan and overdraft portfolio, and financial statements; and annually the financial statements.

  • Some performance indicators to be monitored include: profitability ratios, net earnings, return on assets, return on shareholdings equity, working capital, current stock to current asset ratio, interest cover, financial gearing ratio, dividend cover and earnings per share ratio.

48. The government is divesting its ownership in selected SOEs through management and employee purchases or through the National Enterprise Limited (NEL) listed on the stock exchange. The arrangement involves NEL purchasing government shares in SOEs and selling NEL shares to the private sector. This enables profitable and non profitable enterprises to be sold as a package.

49. In addition, the government is restructuring CARONI. A Voluntary Separation Employment Package was offered to all employees (See Chapter IV). An Estate Management and Business Development Company was established to manage leasing of land belonging to CARONI, while government plans to takeover CARONI liabilities. Furthermore, the government is also considering action on National Broadcasting Network (engaged a divestment consultant), Government Information Services, Trinidad and Tobago Unit Trust Corporation (drafting the Bill), First Citizens Bank Ltd. (restructuring the balance sheet), Export-Import Bank of Trinidad and Tobago, and Agricultural Development Bank Ltd.

E. Alternative Sequencing of Public Enterprise Reforms

50. While the government plans to expedite divestment in selected SOEs, the reform process can be more transparent and more focused to meet government objectives. A stylized framework, based on empirical studies on public enterprise reform, is helpful to define the scope and sequence of the reform process (Box 2).

51. The first level of reforms should enhance the role of the market in economic decisions in order for the SOEs to improve performance thereby reduce the adverse fiscal impact, and efficiently distribute resources. This would imply that fair and open competition should be encouraged by decontrolling tariff rates for public goods and services, liberalize restricted markets particularly in fuel retailing, water, electricity and telecommunications services, and eliminate direct and indirect preferential support from the government.

52 The second level of reform should be to rationalize the entire public enterprises sector. The criteria and timeframe for divesting management or ownership should be explicitly defined to establish credibility and to win support of groups involved in decision making and those affected. Based on empirical studies, four categories to group SOEs have been suggested (Box 3):

  • In category 1, SOEs that can be easily divested because a private activity exists, small capital investment is required, foreign investment is not crucial, and a special regulatory framework is not necessary.

  • In category 2, SOEs that need legislation to be changed; new investment is required to restructure the enterprise to become viable; and foreign investment is crucial to provide new capital, technology and expertise.

  • In category 3, SOEs for partial or gradual divesture because substantial restructuring is required; foreign direct investment is necessary; and a special regulatory regime should be established.

  • In category 4, strategic SOEs where ownership would remain with the government. The government involvement is kept particularly where there is poor regulatory capacity, weak restructuring capacity due to thin capital markets, concentrated ownership, large capital requirement for physical restructuring, unattractive to private investors, enterprises which are major employers in countries with high unemployment or fragile political/social structures, and where there is a cash flow constraint to liquidate government equity or debt of the SOEs.

Stylized Levels of Public Enterprise Reform

Public enterprise reform takes place at four levels, as follows:

  • (1) Promoting fair and open competition by

    • Deregulating markets

    • Breaking up large monopolies

    • Liberalizing imports

    • Ending public enterprise preferential treatment such as direct and indirect subsidies (e.g. the “soft budget”)

  • (2) Rationalizing the public/private sector mix by

    • Divesting ownership (sale as a going concern, give away, or liquidation of assets)

    • Divesting management (contracting out the delivery of public sector services, management contracts, leases, franchises, concessions)

  • (3) Rationalizing government and enterprise role and relationship by

    • Better specification and mutual understanding of goals and performance indicators

    • Intra- government coordination requisite to improved enterprise performance

    • Removing constraints on managerial autonomy in pricing, purchasing, personnel recruitment and compensation, foreign travel, etc.

    • Introducing performance-linked management incentives

    • Reinforcing managerial accountability through central monitoring and evaluation systems and possible use of sanctions

    • Separating non-commercial and regulatory functions from commercial functions, providing transparent compensation for agreed non commercial functions, and transferring regulatory functions back to the government

    • Improved procedure for management selection

    • Abolition of special public enterprise personnel regime and re-employment of personnel according to private enterprise law

  • (4) Enterprise level restructuring by

    • Reconstituting the enterprise in the same legal form as a corporate level enterprise

    • Changes in products and markets

    • Financial restructuring (debt-equity swaps, clearing of interlocking debts, debt rescheduling)

    • Management and organizational changes

    • Retrenching surplus staff and spinning off operations that can be under-taken on contracts

    • Rehabilitating/modernizing assets and introducing new technology

    • Relocating production and other facilities

    • Introducing management systems such as corporate planning and monitoring.

Source: Extract from United Nations, 1995 “Performance contracting for public enterprises”.

Prototypical Pattern of SOE Characteristics Affecting Scope And Sequence of Divestment.

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Source: Based on Morris Bornstein, 1999 “Framework Issues in the Privatization Strategies of the Czech Republic, Hungary and Poland”

53 The third level of reform should be to rationalize the distribution of decision making of the government and the enterprise. This would include separating commercial, noncommercial and regulatory functions, and restructuring capital, management and the labor force as necessary.

54. The fourth level of reform would be to restructure the enterprises. The governments ownership functions over majority owned public enterprises include the same rights and responsibilities as the functions in the private sector. In its ownership role, the government should - select and appoint competent and qualified persons to enterprise boards according to a widely publicized and transparent process, provide enterprise managements with clear, non conflicting objectives; agree with managements on the strategies and corporate instruments reflecting it; leave management as free as needed to achieve the objectives; oblige management to full and transparent accountability; and perform ex-post evaluations of management performance.

F. Conclusion

55. The authorities could strengthen the public sector reform by explicitly defining the scope, timeframe and sequence of the reform process. The immediate approach should be to establish an enabling environment through enhancing the role of the market in economic decisions. This would facilitate the development of a divestment program for the entire SOE sector based on groups with similar features for action. Fiscal transparency could be improved by separating noncommercial and regulatory functions from the SOEs, while restructuring the SOEs to become viable enterprises.

References

  • Issues and Developments in Public Management, 1996–97, Organization for Economic Cooperation and Development.

  • Morris Bornstein, 1999, “Framework Issues in the Privatization Strategies of the Czech Republic, Hungary, and Poland,” Center for Research Post Communist Economies, Volume 1.

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  • Performance Contracting for Public Eenterprises, 1995, United Nations Department for Development Support and Management Services.

  • State Enterprises Performance Monitoring Manual, 2002, Trinidad and Tobago Ministry of Finance.

  • The Changing Role of Government: Management of Social and Economic Activities,” 1991, Commonwealth Secretariat.

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Prepared by Phebby Kufa.